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From Open Banking APIs to Banking-as-a-Service: How big is the leap?

Open Banking and Banking-as-a-Service (BaaS) are terms used for APIs in the financial space. But do they mean the same - can they be used interchangeably? Does a bank automatically offer Banking-as-a-Service when it offers Open Banking APIs?

Commonalities

Both Open Banking and Banking-as-a-Service are terms used to refer to financial APIs that are provided by banks. And being APIs, they can be embedded into other products and services. The API consumers, let’s call them fintechs, provide the app, the context in which the API is embedded. Due to the capability of APIs to be embedded, both Open Banking and Banking-as-a-Service can be subsumed under the term Embedded Finance.

Differences

The difference between Open Banking and BaaS APIs is how deeply the respective type of API can be embedded, how much of the lifecycle of the exposed banking product is captured by the API, and which lifecycle activities of the banking product happen within the embedded context vs. outside of it.

Illustration of the differences

Let’s illustrate the difference with an API that provides access to a cash account. 

If the API allows access to the full lifecycle of a cash account, it is a Banking-as-a-Service API. The complete product lifecycle can happen within the embedded context, i.e. the app of a fintech, covering: creating a new account for an end-user, retrieving metadata of the account, retrieving transaction and balance data from the account, initiating and executing payments from that account and closing the account.

An Open Banking API of a cash account only covers a part of the lifecycle, e.g. retrieving transaction and balance data from the account, but leaves out other lifecycle activities. In an Open Banking API, essential lifecycle activities, such as creating and closing the account are not covered by the API and need to take place e.g. on the website of the bank, inside the mobile app, or even in the bank branch.

BaaS

BaaS provides an autonomous, embeddable product, a product that can completely live within the embedded context. BaaS APIs allow a fintech to build a service that looks like a bank. Using BaaS, the API provider is completely invisible to the end-user - the API consumer is able to completely own the channel to the end-user. The end-users might not even be aware of the existence of the BaaS provider - as they only interact with the fintech (API consumer).

Open Banking

Open Banking only provides embeddable features of a bigger product, which needs to live outside the embedded context. Open Banking APIs do not allow a fintech to build a service that looks like a bank. End-users mainly interact with the bank via the bank's own channels (at least for opening and closing the account) and only sporadically access their data via the Open Banking APIs on a fintech app.

Summary

Open Banking exposes features of banking products as APIs, whereas Banking-as-a-Service exposes banking products as a whole in the form of an API. The functionality covered in Open Banking APIs is only a small subset of the functionality that needs to be covered by a BaaS API.

 

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Comments: (3)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 26 October, 2021, 14:47Be the first to give this comment the thumbs up 0 likes

Nice post. 

My $0.02:

  • Open Banking is sharing of data with third party app / website.
  • BaaS is sharing of data and functionality with third party app / website.

I know this description is not 100% accurate but I'd like to think that it makes the distinction easier to communicate to the mainstream audience.

While we're at it, here's a question I recently read on Twitter: Is BaaS the same as good 'ole Whitelabeling? When I read it, I wasn't sure of the answer. After reading your post, I am. But I'll leave it to you to weigh in first! 

Matthias Biehl
Matthias Biehl - Software AG - Zürich, Switzerland 27 October, 2021, 07:16Be the first to give this comment the thumbs up 0 likes

Hi Ketharaman Swaminathan,

Thanks for your point of view.

In my opinion it might not be too helpful to reduce the distinction between BaaS and Open Banking to the fact wether data or functionality is exposed. Example: Payment APIs provide the functionality of executing payments and are Open Banking APIs e.g. under PSD2. 

I think it is much more helpful to look at the underlying banking product lifecycle and determine whether it is completely covered by APIs. So for the Payment API you would need to ask: What are the preconditions for being able to call the payment API? - It is having an account to execute the payment on. Can the account be created by the API (full lifecycle perspective)? No in PSD2, so it is not BaaS. 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 27 October, 2021, 11:51Be the first to give this comment the thumbs up 0 likes

@MatthiasBiehl:

I get your example. TY.   

Well before Open Banking, there have been third party A2A RTP payment apps like PayM that work off FPS rails provided by banks. They may use custom interface / scraping tech etc. but, functionally, they're no different from the current breed of  A2A RTP apps based on Opening Banking / PSD2 API. So, I wonder if payments is an exception that proves the rule.  

Can you think of any other app that vitiates my distinction between Open Banking and BaaS?

Another way of seeing this is, maybe there's something unique about payments that there can be no payments BaaS at all? Can you think of any? I can't. AFAIK, any third party payment app can work only if payer already has prior account with the bank that processes the payment. No third party app can let the payor to create a bank account on the fly within itself. So, payments is not a good use case to illustrate the difference between Open Banking and BaaS? 

Matthias Biehl

Matthias Biehl

API Strategist

Software AG

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This post is from a series of posts in the group:

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